Over the past year, a lot of investor attention has been focused on drugmakers as the industry increases its profitability in the wake of healthcare reform.

However, this industry isn’t as easy to understand as some others, particularly given that the terminology companies use isn’t always readily understood.

If you’re feeling a bit overwhelmed by the industry’s parlance, don’t worry. We’re here to help. Today, let’s learn more about abbreviated new drug applications, including how they can cause stocks to rise or fall.

The official FDA filingDrugmakers file an Abbreviated New Drug Application, or ANDA, when seeking Food and Drug Administration approval of a generic version of an already-approved medicine.

The filing initiates an FDA review to determine whether a company’s generic formulation is comparable to the previously approved drug. For that reason, the ANDA includes a slate of data for the federal agency to consider.

For a drugmaker to win FDA approval, this information must show the generic version of a drug offers the same dosage form and dosage strength as the existing drug, and that it is administered in the same manner, with the same quality and performance characteristics.

Although that means companies filing an ANDA must provide scientific data, it doesn’t mean generic-drug makers have to clear the same hurdles faced by makers of brand-name drugs. Specifically, the first “A” in ANDA stands for abbreviated because the FDA does not require the same level of human clinical testing that it does for a brand-name drug.

Instead of conducting the various and often large and costly human trials associated with the approval process for an entirely new medicine, generic-drug makers need to only demonstrate bioequivalency to their counterpart. Typically, this is done by measuring the time it takes for a generic drug to reach the bloodstream in 24 to 36 healthy volunteers and by determining the generic drug’s rate of absorption, or bioavailability.

Generic drugs must deliver the same amount of active ingredients in the same amount of time as the brand-name drug for the ANDA to warrant an FDA approval.

What is the market impact of an abbreviated new drug application?When a drugmaker develops an entirely new medicine, the FDA awards that company a period of exclusivity that protects the product from competitors. That exclusivity exists for a specific period of time and can run concurrently with any patent protection secured on the drug from the U.S. Patent and Trademark Office.

Patents expire after 20 years; however, the term of FDA exclusivity varies. Orphan drug exclusivity lasts for seven years, while new chemical entity exclusivity lasts for five years. If pediatric exclusivity is granted, an additional six months can be added to patents and exclusivity.

Generic drugmakers file ANDAs to take advantage of the expiration of protection on brand-name drugs. As a result, an ANDA filing can indicate a real commercial threat to the revenue being generated by a brand-name counterpart. It can also suggest a new revenue opportunity for the generic drugmaker. For this reason, the ANDA filing can cause the share price in a brand-name drugmaker to drop and the share price of a generic drugmaker to climb.

Many moving partsThe filing of an Abbreviated New Drug Application doesn’t guarantee the FDA will approve the generic formulation. Additionally, generic drugmakers can file ANDAs prior to patent expiration, and they can legally challenge the validity of patents in a bid to speed up their commercialization timelines.

As a result, investors should do their own due diligence when an ANDA is filed, including a review of a brand-name drug’s patent protection and consideration of any legal proceedings that are under way that could threaten a brand-name drug’s patent protection. One way to do this is to review a company’s annual 10-K report, which is filed with the Securities and Exchange Commission.

Understanding Abbreviated New Drug Applications can help investors navigate this industry, but it’s far from the only consideration to keep in mind. There’s much to learn when it comes to investing in drugmakers, which suggests that educating yourself is the best way to make better investing decisions.